R Sukumar of Franklin Templeton Invetments (India) continues to be positive on the longer term prospects of the market although he feels that rising interest rates and inflation could pose as a problem in the short term. He expects to find some pressure on profitability of the corporate sector. He expects the markets to consolidate in the near term.
He further adds that Franklin Templeton is currently overweight on frontline IT stocks rather than midcap IT.
Excerpts from CNBC - TV18's exclusive interview with R Sukumar:
What is your own feeling looking at all those global and local cues that the market has been debating, what is your sense of the market now?
I continue to be positive on the longer term prospects. In the near term, there are quite a few pressure points; one of them is, of course, rising interest rates and inflation. But other issues that we need to contend with is probably some pressure on profitability of the corporate sector.
Margins for some of the sectors might go down, also earnings growth for the last five years are at an average of 30% and longer term sustainable rate is lower, it will be 15-20% and when we tread down to that, level some of the investors might become negative. So these are some of the pressure points that we need to contend with in the next 2- 3 quarters. The market has to consolidate in the near term. There are a mix of bulls and bears at this point, which are pretty healthy for the market and post the consolidation, the prospects are good.
Where do you find the market trading at right now, given all these concerns interest rates, earnings slowdown etc, do you think it is fairly valued, cheap or expensive and what is your prognosis for the next 9-12 months?
Quality stocks are reasonably priced at this point of time because the long term prospects are good. But there are quite a few companies, which grew substantially in the last few years because of the acceleration in the economic growth rate and inability of some of the best companies to cater to all the growth. Once the economy stabilizes by a particular level and interest rates go up and other pressure points have an effect on these companies, these could get de-rated.
So while in the 2002-2006 period we saw differential in valuation metrics contracting between the best companies and the worst companies in the next few years, we would see that widening, apart form general macro trends, these are going to be sub trends and one has to watch out for that if we have to make money going forward.
What is your take on the whole frontline technology space now and what did you make of what Infosys had to say about next year?
The demand situation continues to be strong; the pressure is coming from currency appreciation and rising cost so there is margin pressure for this sector on the whole. The top 3-4 companies are better plays to face this type of a situation because of the economies of scale and the fact that the management is very good and proactive whereas the others might face substantial margin pressures over a period of time. So the sector has been consolidating. Bigger and better companies have been growing faster and I expect that trend to continue going forward.
So you would be more overweight on frontline IT or heavyweight IT rather than midcap IT at this point?
Absolutely.
Do you find a lot of attractive valuations in the whole midcap universe because those stocks have corrected far more than some large caps in the last 6-9-12 months or would you rather stay out of that midcap universe today?
I would say it is not easy to find a whole lot of stories where you would have comfort in terms of both valuation and long-term business prospects. There are handful of them but as a category, I would think that it is not the best category to be in at this stage of the market because the midcaps have been re-rated in the last few years and the discount to large caps has narrowed considerably.
The second is when the going gets tough, the larger companies are in a better position to weather the storm - be it interest rates or wage pressure or anything else, these things affect the midcap companies more. The third, many of them have to increase their capacities and the capital discipline going away will also have an impact. I wouldn't be too optimistic as a category related to large caps at this point of time.
We saw the banks stage a little bit of a comeback on Friday and that is because of the inflation, the WPI numbers dip below 6%, how have you positioned yourself in the public sector banking space?
We aren't still comfortable about the long-term prospects of the public sector banks. There is some valuation comfort now. It might be worth looking at a few of them but the structural story continues to be weak. The quality of the business hasn't improved substantially infact the private sector has improved the competitive advantages vis-a-vis public sector banks.
Issues like salaries, getting good quality, management and other stuff - which for example in China, the state owned banks have done a brilliant job of restructuring - whereas in India, they have been very slow to react to the situation. Structurally, it is a weak story though there are a few stocks, which one can look at because of comfortable valuations.
Would you be buying autos right now or property stocks or some of the other rate sensitive other than banks?
Yes. we would be looking at the good quality auto stocks; there is quite a bit of pessimism because of the rate increases. I would think that over a period of a year or two, the demand would surprise positively because of demographics and structural drivers, which will demand for these products.
On property, I would be much more wary -- property prices are too high, considering the income levels and that will be a source of worry for me and whether demand can sustain because a lot of demand has actually come from speculators and the actual users in the last two years. There could be a drop in demand as well and it will be a double whammy of both -- the property prices have dropped and the demand drop.
What is your weightage on global commodity like steel and aluminum right now because in the last few days, we have seen a good rally in many of the metal stocks led by good spurts in commodity prices globally, what are your thoughts there?
Generally, we are growth investors and structurally, we are always underweight commodities except at some point of time on selective companies where we see them growing over a sustained period of time, we have a very low weightage at this point of time on commodity stocks.
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